What is Barriers to Entry
Barriers to entry is the economic term describing the existence of high startup costs or other obstacles that prevent new competitors from easily entering an industry or area of business. Barriers to entry benefit existing firms because they protect their revenues and profits. Common barriers to entry include special tax benefits to existing firms, patents, strong brand identity or customer loyalty, and high customer switching costs.
Barriers to Entry
BREAKING DOWN Barriers to Entry
Some barriers to entry exist because of government intervention, while others occur naturally within a free market. Often, industry firms lobby for the government to erect new barriers to entry. Ostensibly, this is done to protect the integrity of the industry and prevent new entrants from introducing inferior products into the marketplace. Generally, firms favor barriers to entry when already comfortably ensconced in an industry to limit competition and claim a larger market share. Other barriers to entry occur naturally, often evolving over time as certain industry players establish dominance. Barriers to entry are often classified as primary or ancillary. A primary barrier to entry presents as a barrier alone (e.g. large startup costs). An ancillary barrier is not a barrier alone; rather, combined with other barriers, it weakens the potential firm's ability to enter the industry. It serves as a reinforcement to other barriers.
Government Barriers to Entry
Industries heavily regulated by the government are usually the most difficult to penetrate; examples include commercial airlines, defense contractors, and cable companies. The government creates formidable barriers to entry for varying reasons. In the case of commercial airlines, not only are regulations stout, but the government limits new entrants to limit air traffic and simplifying monitoring. Cable companies are heavily regulated and limited because their infrastructure requires extensive public land use.
Sometimes the government imposes barriers to entry not by necessity but because of lobbying pressure from existing firms. For example, in many states, government licensing is required to become a florist or an interior decorator. Critics assert that regulations on such industries are needless, accomplishing nothing but limiting competition and stifling entrepreneurship.
Natural Barriers to Entry
Barriers to entry can also form naturally as the dynamics of an industry take shape. Brand identity and customer loyalty serve as barriers to entry for potential entrants. Certain brands, such as Kleenex and Jell-O, have identities so strong that their brand names are synonymous with the types of products they manufacture.
High consumer switching costs are barriers to entry as new entrants face difficulty enticing prospective customers to pay the additional money required to make a change/switch.